Shattered myths mean no let up in commodity markets

After locking themselves into a long-term contract, procurement chiefs could be forgiven for only giving the commodity markets a cursory glance over their morning cup of coffee, but recent price moves in the natural gas market prove there is no time to rest on any laurels.

Between February and April this year, natural gas prices on the CME Nymex rose from $3.153 per million British thermal units (mmBtu) to $4.408. After reaching this yearly high, prices steadily fell and on August 9 settled at $3.23.

There have been many different factors at play in the natural gas market including the shale revolution, a slowdown in extraction, the subsequent squeeze on supplies geo-political factors and the weather.

Most recently prices have been pressurised down by a spell of mild weather lingering over the US, which has dampened demand for air-conditioning units, which are run off electricity generated from natural gas.

Traditionally procurement chiefs will have almost certainly purchased natural gas according to seasonal demand. Between the months of October and January demand peaked as heating systems in the Northern Hemisphere were turned on to keep the cold out.

Now, as one procurement chief said recently, it is becoming increasingly difficult to rely on history, which makes it increasingly difficult to decide on purchasing strategies.

“Prices used to be seasonal but that seems to be changing now, they are driven more now by geo-politics, conflict and speculation,” said Brent Harkins, head of procurement at Wales & West Utilities.

What then do procurement chiefs have to rely on to make these all-important buying decisions?

They have two things. One is up-to-date intelligence and the other is physical market data.

Current data and intelligence are suggesting that over the next few weeks, although prices may rise because of rising temperatures in the US, moving further forward prices are likely to fall further.

Regardless of where prices go next, this year has proved that there is simply no substitute for procurement chiefs keeping their finger on the pulse of the commodity markets.

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